Question

Buying your suppliers is a way of guaranteeing price stability and improving the co-ordination of your value chain. But does it make sense? Consider the ways in which purchasing a supplier represents a form of market failure, and consider the inefficiencies that might arise as a result. . The recommended word count is 300 - 400 words.

Answer 1

The organizations create value chain through its network production where all its production related activities get interconnected in a sequence in production system. Key features of the processes are sourcing and procurement of raw material and supplies, production scheduling and planning, product of final product, order processing of the finished goods, inventory control in its production process, ware-housing and material handling and transportation and distribution of product to final consumers. The sourcing and procurement of raw material and supplies of the company can be done through the suppliers of the company.

Suppose company is buying its suppliers is a way of guaranteeing price stability and improving the co-ordination of in value chain. Through this business strategy, company can reduce its dependency to the external business partners in their supply chain process. The company purchases its direct supplies to reduce it dependency on its suppliers for its raw materials for assured and quality supply of its raw materials at stable price. The company can get benefited by this strategy by assuring the quality of its product from manufacturing to consumption by opting for the direct control on overall process.

But purchasing a supplier can become a form of market failure also as the sourcing and supply chain of raw materials is totally different business from the production and manufacturing and required unique characteristics to handle the process successfully. Therefore sometime mixing both processes can become disastrous for the core business of the company. The inefficiencies that might arise as a result buying the suppliers are

• The company can get diverted from its core business of processing
• The extra workload on human resources can reduce the quality
• Company has no bargaining power for quality of supplies as it is now done by its own
• It is nor free to explore the various sources for better price and quality
• The company now have to bear the weaknesses of the supplier’s processes